No. A16-0239

STATE OF MINNESOTA IN SUPREME COURT _____________________________________________

October 11, 2016

State of Minnesota, by its Attorney General Lori Swanson, Petitioner vs. Minnesota School of Business, Inc. d/b/a Minnesota School of Business, et al., Respondents. _____________________________________________ PETITION FOR REVIEW OF DECISION OF COURT OF APPEALS AND ADDENDUM _____________________________________________ DATE OF FILING OF COURT OF APPEALS’ DECISION: September 12, 2016 _____________________________________________

JOE ANTHONY (#0002872) Attorney at Law Ostlund Baer & Louwagie, P.A.

LORI SWANSON Attorney General State of Minnesota

BROOKE ANTHONY (#0387559) Attorney at Law

ALAN I. GILBERT (#0034678) Solicitor General

AMELIA R. SELVIG (#0393392) Attorney at Law

KATHRYN I. LANDRUM (#0389424) Assistant Attorney General

DANIEL R. HALL (#092757) Attorney at Law

ADAM WELLE (#0389951) Assistant Attorney General

90 South 7th Street 3600 Wells Fargo Center Minneapolis, MN 55402

445 Minnesota Street, Suite 1100 St. Paul, Minnesota 55101-2128 (651) 757-1450

ATTORNEYS FOR RESPONDENTS

ATTORNEYS FOR PETITIONER

To:

The Supreme Court of the State of Minnesota: Petitioner State of Minnesota requests Supreme Court review of the above-entitled

decision of the Court of Appeals upon the following grounds: LEGAL ISSUES 1.

Are the loans issued by Respondents to their students subject to the 8% usury rate for loans under Minn. Stat. § 334.01 or the 18% usury rate for open-end credit under Minn. Stat. § 334.16? The court of appeals determined that the loans are subject to the 18% usury rate for open-end credit even though the loan documentation states that the loans are not open-end credit and provide disclosures for closed-end credit, the loans do not satisfy the requirements of open-end credit, and the State’s usury laws must be liberally construed in favor of consumers.

2.

Do Respondents need to be licensed under Minn. Stat. § 56.01 to engage in the business of making loans? The court of appeals concluded that an entity must be licensed to engage in the business of making loans only if the entity’s loans are usurious. The criteria relied on to support the Petition are set forth in Minn. R. Civ. App. P.

117(a), (c) and (d)(2) and (3). STATEMENT OF CASE This Petition involves a consumer-protection action commenced by the State in July 2014. The State asserted, in part, that Respondents engaged in unlawful lending practices by issuing thousands of loans to their students at usurious interest rates and without being licensed to issue the loans. On December 29, 2015, the district court denied the State’s motion for summary judgment and injunctive relief regarding the lending claims.

The court of appeals

affirmed in a published decision. State v. Minn. Sch. of Bus., Inc., ___ N.W.2d ___ (Minn. App. Sept. 12, 2016). ARGUMENT This case raises important state-wide public issues and the need for clarification of the law regarding Minnesota’s lending statutes. This particular matter involves 6,000 college students who were issued loans by Respondents on or after January 1, 2009, because the tuition charged by Respondents exceeded the federal and private student loan proceeds received by Respondents on behalf of these students. (Add. 3.) The student loans issued by Respondents were typically for $7,500 per school year and many students took out these loans for multiple school years. Most of the loans imposed an interest rate of 18% and some of the loans have a 12% interest rate. (Id.) Minnesota’s usury rate for a loan is 8%. Minn. Stat. § 334.01. Although Respondents repeatedly refer to the word “loan” in their documentation signed by students, they claim that the loans are “open-end credit” under Minn. Stat. § 334.16, which is subject to an 18% usury rate. Section 334.16 was enacted in 1971, and incorporates the federal Truth in Lending Act (“TILA”) and related regulation’s (“Regulation Z”) definition of “open-end credit.” Minn. Stat. § 334.16, subd. 2. I.

RESPONDENTS ISSUED THOUSANDS OF USURIOUS LOANS TO THEIR STUDENTS. It is undisputed that under the current TILA definition of open-end credit, which

was enacted by Congress in 1980, Respondents’ loans are not open-end credit. (Add. 8.) It is also undisputed that as of 2008, TILA and other federal laws specifically provided that such student loans are not open-end credit. (Id., 10-11.) In accordance with the 2008 2

laws, Respondents expressly state in the loan documentation signed by their students that the loans “are not part of an open-end credit plan,” and they provide to their students disclosures required by TILA for “closed-end credit,” not open-end credit. (Id.) Even the 1971 version of TILA and section 334.16, which require open-end credit to provide that a finance charge may be computed “from time to time on an outstanding unpaid balance,”1 are not satisfied by Respondents’ loans. See Official Interpretation2 of TILA in Regulation Z, Supplement I (Part 1) to Part 1026, 12 C.F.R. § 1026.2(a)(20)(4) (“The requirement that a finance charge may be computed and imposed from time to time on the outstanding balance means that there is no specific amount financed for the plan for which the finance charge, total of payments, and payment schedule can be calculated.”). Indeed, as noted above, Respondents’ loans plainly provide for a “specific amount financed” and accordingly Respondents make the necessary disclosure to students pursuant to TILA’s closed-end credit requirements. See, e.g., 15 U.S.C. § 1638(e)(2)(H) (requiring “estimate of the total amount of repayment”). The 1971 version of TILA and section 334.16 also require that open-end credit provide for the consumer to make purchases “from time to time.” Minn. Stat. § 334.16, subd. 1(a); 15 U.S.C. § 1602(i) (1970). The court of appeals stated that “this factor

1

See 15 U.S.C. § 1602(i) (1970) (stating “a finance charge may be computed on the outstanding unpaid balance from time to time”); Minn. Stat. § 334.16, subd. 1(a) (stating “a finance charge may be computed by the seller from time to time on an outstanding unpaid balance”). 2

Official TILA interpretations are entitled to substantial deference. See, e.g., Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980).

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presents a close call” and acknowledged that Respondents’ students need not “do anything to receive funds on the disbursement dates after completing the loan application.” (Add. 14.) The court nevertheless erroneously construed the statutory requirement to be satisfied and did not liberally construe the law in favor of the students. See, e.g., Ly v. Nystrom, 615 N.W.2d 302, 308 (Minn. 2000) (holding that “remedial” statutes “should be liberally construed in favor of protecting consumers”). Although this Court has not had the opportunity to interpret section 334.16, several published decisions of the Minnesota Court of Appeals have construed the law. The court correctly applied the 1980 version of TILA in American Accounts & Advisers v. Hendrickson, 460 N.W.2d 83, 84 n.1 (Minn. App. 1990), to analyze section 334.16. The court reasoned that the “current version of [TILA] presents a detailed definition of open-end credit plan which is consistent with, and closer to, the definition developed by the federal courts [based on the 1971 version of TILA].” Id. (citing federal cases). Three decisions of the court of appeals followed the American Accounts precedent and applied the 1980 version of TILA in analyzing section 334.16. Peterson v. Gustafson, 584 N.W.2d 660, 662 (Minn. App. 1998); John David Contracting, Inc. v. Brozek, 535 N.W.2d 397, 398 (Minn. App. 1995); Groth Lumber Co. v. Dahl, No. A05-1362, 2006 WL 1738048, at *3 (Minn. App. June 27, 2006). In this case, the court of appeals, inexplicably, failed to apply this precedent, summarily stating that it was “dicta” or “otherwise undeveloped.” (Add. 10.) The court also misapplied the applicable characteristics of open-end credit, again ignoring, for example, that Respondents’ loans explicitly provide for a fixed amount of debt at the time 4

the loan is executed. See, e.g., Goldman v. First Nat’l Bank of Chicago, 532 F.2d 10, 17 n.11 (7th Cir. 1976) (“An open end credit plan is one in which credit terms are initially established with the opening of the account, but no fixed amount of debt is incurred[.]”) (cited in American Accounts, 460 N.W.2d at 84 n.1); see also supra at 3. Although the court found it “troubling” that Respondents’ disclosures to students stated that the loans are not open-end credit, (Add. at 11), it failed to apply the plain language of the contract. See City of Duluth v. Fond du Lac Band of Lake Superior Chippewa, 843 N.W.2d 577, 581 (Minn. 2014) (“[W]e enforce the agreement of the parties as expressed in the language of the contract.”). Even assuming an ambiguity existed, the loan documents must be construed in favor of the students. See Hilligoss v. Cargill, Inc., 649 N.W.2d 142, 148 (Minn. 2002) (holding that “ambiguous contract terms must be construed against the drafter[.]”). The court of appeals also improperly applied Minn. Stat. § 645.31, subd. 2, which states: “When an act adopts the provisions of another law by reference it also adopts by reference any subsequent amendments of such other law, except where there is a clear legislative intention to the contrary.” (Emphasis added.) This Court has recognized the importance of section 645.31, subd. 2, stating that “[i]t would be unworkable and illogical to lock” the State into outdated federal regulations. Minn. Recipients Alliance v. Noot, 313 N.W.2d 584, 587 (Minn. 1981). Consistent with the purpose of section 645.31, subd. 2, there is no clear legislative intent precluding the application of amendments to TILA and Regulation Z after 1971. Section 334.16, enacted in 1971, merely identified the version of TILA and Regulation Z 5

in effect at that time, and failed to disclaim that subsequent amendments to TILA and Regulation Z were not adopted by reference. There is no evidence of legislative history establishing that the Legislature intended to disregard subsequent TILA and Regulation Z amendments contrary to the strong presumption in section 645.31, subd. 2. Nor is there any legislative intent indicating why the Legislature would even want to do so. Moreover, a failure to adopt by reference subsequent amendments to TILA and Regulation Z would present a constitutional issue regarding the preemptive effect of federal law.3 See 15 U.S.C. § 1610(a)(1); 12 C.F.R. § 1026.28 (providing that TILA and Regulation Z preempt inconsistent state law). It is presumed that the Legislature intended section 334.16 to be constitutional, see Minn. Stat. § 645.17(3), and accordingly the statute should be construed to avoid a constitutional issue. State v. Irby, 848 N.W.2d 515, 522-23 (Minn. 2014). In any event, as the court of appeals previously concluded, the 1980 amendment to TILA simply clarified applicable law based on federal court decisions interpreting the 1971 version of TILA. See supra at 4. Consistent with this case law, the legislation and corresponding changes to Regulation Z in 1981 made clear that open-end credit necessarily involves a line of credit that is “replenished” as incurred debt is repaid, which “distinguishes open-end credit from a series of advances made pursuant to a closed-end credit loan commitment.” See Official Interpretation, Supplement I (Part 1) to Part 1026,

3

This issue was properly raised in Petitioner’s reply brief at 3-4 to rebut an argument made in Respondents’ brief. See Goeman v. Allstate Ins. Co., 725 N.W.2d 375, 378 (Minn. App. 2006).

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12 C.F.R. § 1026.2(a)(20)(5); Goldman, 532 F.2d at 18 (recognizing same principle). As noted above, Respondents concede that their loans do not satisfy this replenishment requirement of open-end credit. (Add. 8.) II.

RESPONDENTS VIOLATED MINN. STAT. § 56.01. The court also misconstrued the licensing requirement for an entity engaged in the

“business of making loans.” See Minn. Stat. § 56.01. Respondents did not dispute that they are engaged in the business of making loans. However, the court concluded that the licensing requirement only applies if the entity engaged in the business of making usurious loans. (Add. at 16.) As discussed above, most of Respondents’ loans are usurious. Regardless, a licensing requirement based on the entity’s issuance of usurious loans produces an impermissible absurd and unreasonable result, see Minn. Stat. § 645.17(1), which would require the State to license usurious lenders. The court also failed to liberally construe the statute in favor of consumers. See supra at 4. Properly construed, section 56.01 requires an entity engaged in the business of making loans to be licensed and charge an interest rate permitted by law. III.

THIS COURT SHOULD REVIEW THE COURT OF APPEALS DECISION. There is a compelling public interest need for this Court to review the court of

appeals’ decision. The court summarily rejected 26 years of its own correctly-decided precedent, which was the only Minnesota precedent interpreting section 334.16, and its interpretation of section 56.01 involves an issue of first impression. The court’s decision is wrong for several different reasons and directly and adversely affects consumers throughout the State contrary to the very purpose of the State’s lending laws. 7

Clarification of the applicable laws, which involve important recurring issues, will greatly benefit the public and the bench and bar of this State. Dated: October 11, 2016

Respectfully submitted, LORI SWANSON Attorney General State of Minnesota s/ Alan I. Gilbert ALAN I. GILBERT (#0034678) Solicitor General KATHRYN I. LANDRUM (#0389424) Assistant Attorney General ADAM WELLE (#0389951) Assistant Attorney General 445 Minnesota Street, Suite 1100 St. Paul, Minnesota 55101-2128 (651) 757-1450 ATTORNEYS FOR PETITIONER STATE OF MINNESOTA

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